Pre-year-end tax planning for individuals – key factors to consider

We have made bold below actions that should be considered before 5 April 2023 to minimise your personal tax liability and maximise your benefits from the available reliefs.

 

1)    Dividends

• Everybody can earn £2,000 tax-free from dividends in the year to 5 April 2023.
• This dividend allowance is reducing to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.

If you are the owner of a company, with distributable reserves available, then make sure you have declared the maximum dividend to utilise your dividend allowance.

The gift of shares between spouses or civil partners is exempt for Capital Gains Tax (CGT) purposes and so you may want to consider gifting some shares to your spouse, so each of you can then receive the £2,000 tax-free dividend.

2)    Pension contributions

• Pension contributions, up to certain qualifying limits, are free from income tax.
• The contributions available for relief are limited to the higher of £3,600 and the individuals relevant UK earnings for that year, with an annual maximum contribution cap of £40,000 (pension annual allowance).
• Relevant UK earnings include trading income, salaries, bonuses, and benefits in kind but not dividends, rental income, state benefits or savings income.
• The annual allowance is tapered for higher earners as tax relief available on their pension contributions is limited, the annual allowance is reduced (tapered) if an individual’s threshold income exceeds £200,000 and adjusted income exceeds £240,000.
• Tapering reduces the annual allowance by £1 for every £2 of adjusted income above £240,000.

How is tax relief claimed if you are a basic rate taxpayer?

You make a personal pension contribution net of basic rate tax, and the provider claims the tax relief from HMRC on your behalf. The total contribution into the fund is therefore the grossed-up amount, you have benefitted from an additional 20% of the total contribution on top of your personal investment. A £10,000 net contribution results in £12,500 gross investment into the pension fund

And how can the additional tax relief be claimed if you are a higher or additional rate taxpayer?

Additional tax relief is claimed on your tax return. The gross pension contributions made extends your basic and higher rate bands and so increases the amount of income taxed at 20%, rather than 40% or 45%.  

When can pension contributions be especially effective?

Consider pension contributions if you are a higher or additional rate taxpayer, especially if you have just exceeded an income rate band and are a marginal taxpayer.

Consider pension contributions if your expected income in 2023 is likely to exceed £50,000 and you or your partner are in receipt of child benefit.

The High-Income Child Benefit charge applies when your adjusted net income exceeds £50,000 and reduces the amount of child benefit you are entitled to by 1% for every £100 of income over the £50,000 threshold. If your income exceeds £60,000, you lose entitlement to child benefit completely. Pension contributions reduce your adjusted net income and so reduce the tax charge payable.

Consider pension contributions if your expected income in 2023 is likely to exceed £100,000 as when you earn over £100,000, you start to lose your tax-free personal allowance.

You lose £1 of your allowance for every £2 that your adjusted net income exceeds £100,000 and so your effective rate of tax becomes 60%. Pension contributions reduce your adjusted net income and if reduced below £100,000 will preserve your personal allowance completely.

Pensions are also tax-effective from an Inheritance tax (IHT) perspective as pension funds do not usually form part of your chargeable death estate.

Please remember to make pension contributions BEFORE 5 April 2023 to receive the benefit in the 2023 tax year. Pension contributions cannot be backdated.

3)    Gift aid donation

• Donating through Gift Aid means charities can claim an extra 25p for every £1 you donate; the charities claim the basic rate tax relief on the value of the gift.
• Higher and additional rate taxpayers can then reclaim the additional tax relief on the value of the gift; an additional 20% for higher rate taxpayers and 25% for additional rate taxpayers.

Gift aid donations extend your basic rate and higher rate tax bands, similarly to how pension contributions do, and so are especially useful for you if you are paying marginal rates of tax. They can also help to reduce your high-income child benefit charge or preserve your personal allowance as reduce your adjusted net income.

Consider gift aid donations if you are a higher or additional rate taxpayer or if your expected income in 2023 is likely to exceed £50,000 or £100,000. Remember you are losing the benefit of this income personally, but your chosen charity is benefitting.

Gift aid donations can be carried back into the previous tax year and so you have until filing your tax return to donate. This can be beneficial if you were a higher rate taxpayer in the previous year but are now a basic rate taxpayer.

If you have made donations through gift aid, then please make sure the donations are recorded and noted on your tax return information, so you receive the tax relief available to you.

4)    Savings

• Basic rate taxpayers (20%) can earn £1,000 in savings interest per year tax-free.
• Higher rate taxpayers (40%) can earn £500 in savings interest per year tax-free.
• Additional rate taxpayers (45%) have no tax-free allowance.

 

Are you unlikely to utilise all your Savings Allowance this year?

If you have not fully utilised your Savings Allowance and are a director of a company, you could consider charging the company interest at a market rate for any balances that it owes you. This is only beneficial from a tax perspective in certain circumstances so would need to be looked at on a case-by-case basis.

Or perhaps you are likely to exceed the Savings allowance?

Consider Individual Savings Accounts (ISAs) – tax free saving accounts for individuals.

• You can invest up to £20,000 in 2022-2023 into a cash or a stocks and shares ISA.
• Interest is received tax-free in a cash ISA.
• Dividends and capital gains are also tax-free in a stocks and shares ISA.
• If 2022-23 ISA allowances are not used by 5 April 2023, they are lost.

Recent rises in interest rates are making tax-free savings accounts a lot more attractive, so definitely something to consider more closely in the future.

5)    Tax-efficient investments

If you have considered pensions and ISAs already, then there are other tax-efficient investment opportunities available. The availability of cash funds and other events may dictate how appropriate these are and personal preference will dictate your investment risk appetite.

The investment vehicles listed are all designed primarily to encourage investment into early-stage, unlisted, startup companies. These companies have a high chance of failure and there is no guarantee of future income from the investment, or their value being retained.

These investments are high-risk but are accompanied by a generous range of investor tax reliefs.  We cannot advise on individual investments – you should seek appropriate Independent Financial Advice.

• Seed Enterprise Investment Schemes (SEIS)

  • 50% income tax relief on value of investment up to £100,000.
  • Capital gains tax reinvestment relief, 50% of existing capital gain can be eliminated if its value is invested in SEIS companies.
  • Disposal of SEIS shares exempt from CGT after three-year qualifying period.

• Enterprise Investment Schemes (EIS)

  • 30% income tax relief on value of investment up to £1,000,000.
  • Capital gains can be deferred if reinvested in EIS companies.
  • Disposal of EIS shares exempt from CGT after three-year qualifying period.

• Venture Capital Trusts (VCTs)

  • 30% income tax relief on value of investment up to £200,000.
  • Dividends received are tax-free.
  • Disposal of VCT shares exempt from CGT after five-year qualifying period.

 

6)    Capital Gains

• The CGT annual exempt amount for the 2023 tax year is £12,300.
• This tax-free allowance is reducing to £6,000 for the 2024 tax year and then to £3,000 the following year.

CGT is currently payable at 18/28% for residential property or 10/20% for other chargeable assets. This reduction in allowance could result in an increased tax liability of up to £1,764 after a residential property disposal in 2024, or an increased tax liability of up to £2,604 after a disposal in 2025. These figures are per individual and so for a jointly owned assets, with two annual allowances being affected, the increase would be doubly great.

If you are planning on selling any assets liable to CGT, consider selling before 5 April 2023 to utilise the larger tax-free annual exempt amount.

You may also want to consider crystallising certain gains to utilise the larger allowance currently available.

 

7)    Capital Losses

• Any capital losses arising in a tax year are first offset against the capital gains in the same year, even if the gains would be covered by the annual exemption (this may mean the annual exemption is lost, but this will have little effect when only £3,000)
• Any excess of capital losses are then carried forward to offset against future capital gains.

Capital losses will become increasingly important going forward, due to the reduction of the CGT annual exempt amount. Offsetting losses against gains will be a valuable method of reducing the CGT payable on a disposal.

Please always try and provide us with the base cost for your capital assets, so we can claim the appropriate loss relief in the future if the assets are disposed of for less than cost. Without a base cost, a claim for capital loss relief cannot be done.

Negligible value claims should also be considered more carefully. If you can give evidence to HMRC to show that your assets (most commonly applicable to shareholdings) no longer have any value, then you can make a claim to treat the asset as being disposed of and immediately reacquired at current market value, usually zero. This claim allows you to realise losses on assets which you would otherwise be unable to sell, as the assets have become worthless during the period ownership.

8)    State pension planning

• The amount of state pension that you will receive depends on the number of years for which you have made National Insurance contributions.
• You need 10 years of NI contributions to claim any state pension at all.  However, to receive the maximum state pension you must have made 35 years of contributions, or had exemptions granted to you for example if you were receiving  working tax credits or had home responsibilities for a year.
• You can obtain a state pension forecast if you do not know your position – contact us for details of how to do this
• If you have not reached the maximum entitlement you can make a voluntary NI contribution to improve your position. Currently you can make these contributions to fill any gaps for the 2006 tax year onwards, but this is being restricted.

From 31 July 2023 you will only be able to fill any gaps in your record from the 2018 tax year onwards. For further information regarding this issue as well as a wealth of helpful financial planning guidance we recommend Martin Lewis – https://www.moneysavingexpert.com, episode 12 of his Money Show also covers pensions in detail and is available on ITVX.

We advise reviewing your position well before the end of July so you can consider making any voluntary contributions in good time.